The Very Odd Trade Deal Between the U.S. and China; What Do the Chinese Really Think About It?

President Trump's trade deal with China is not a typical U.S-style trade deal. Most trade deals are crony deals that to a degree benefit particular operators but it is in the framework, as far as the U.S. has been concerned, of free-market trade.

The just-announced deal between the U.S. and China is a statist managed trade animal that could only be designed by people who do not understand free trade or who are willing to bow to any Trump plan no matter how illogical it is. This just signed deal is only a notch above the type of deal that the old Nikita Khrushchev's Soviet Union would make with, say, Castro's Cuba.

The Chinese have to think this deal is nuts and are probably confident there are backdoor loopholes that Trump is not aware of and is unlikely to spot.

At Cato, Simon Lester and Huan Zhu explain the oddity of the deal:

[On Wednesday], President Trump and Chinese Vice Premier Liu He signed a "phase one" U.S.-China trade deal. A "phase two" deal may be coming, although the timing is unclear, and many people (including us) are skeptical that it will happen any time soon. There are some technical and complicated parts of the phase one deal, and it will take some time to digest it all and come up with an overall evaluation. But it's worth exploring some specific aspects right away. One of the most talked about parts of the phase one deal is the commitments by China to purchase large amounts of U.S. products, including agricultural products. Article 6.2, paragraph 1 of the deal has broad details of these purchases:

During the two-year period from January 1, 2020 through December 31, 2021, China shall ensure that purchases and imports into China from the United States of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion.

Given that U.S. exports to China in 2017 were about $180 billion, an additional $200 billion over two years would be a massive increase. The deal further divides up these purchases into manufactured goods, agricultural goods, energy, and services, with specified amounts for each. It then provides sub-categories, but it does not publicly break down the purchase amounts by sub-category (apparently it does so in a confidential version of the text).

This is not a typical trade deal. A normal trade deal would focus on liberalizing trade in both directions (although modern trade deals have gone beyond that and do a lot of regulating). By contrast, this trade deal is an extreme version of managed trade, with China agreeing to buy designated amounts of U.S. products (supposedly "based on market conditions").

Beyond the problematic policy goals, it remains to be seen what all of this means in practice. Here are a few questions that arise: How exactly will China quickly ramp up its purchases? What is the role of the government in this shopping spree? What domestic process will the Chinese government use to induce companies to make these purchases? Are there accounting tricks they can rely on (e.g. reclassifying current Hong Kong imports as Chinese imports)? Will these companies shift current purchases of these products away from other countries' producers and over to U.S. producers (and will those other countries be annoyed)? Can U.S. producers scale up production to meet these targets?

In short, this is a typical Trump kind of program. It is not thought out in detail. It appears very unlikely to work. And it does not appear to be based on any foundational principles,  free-market or otherwise, other than discredited mercantilist thinking.

-RW